CHAPTER 5: INTEREST RATES

2.

• You are considering two ways of financing an Easter holiday.
• You could put it on your credit card, at 15% APR, compounded monthly, or borrow the money from your parents, who want an 8% interest payment every six months.
• Which is the lower rate?

1. Which do you prefer: a bank account that pays 5% per year (EAR) for three years or:
2. an account that pays 2.5% every six months for three years?
3. an account that pays 7.5% every 18 months for three years?

c. an account that pays 0.5% per month for three years?

12.

• You have just taken out a $20 000 car loan with a 6% APR, compounded monthly.
• The loan is for five years.
• When you make your first payment in one month, how much of the payment will go toward the principal of the loan and how much will go toward interest?

23

• The mortgage on your house is five years old.
• It required monthly payments of $1402, had an original term of 30 years and had an interest rate of 9% (APR).
• In the intervening five years, interest rates have fallen and so you have decided to refinancethat is, you will roll over the outstanding balance into a new mortgage.
• The new mortgage has a 30-year term, requires monthly payments, and has an interest rate of 5.625% (APR).

a. What monthly repayments will be required with the new loan?

b. If you still want to pay off the mortgage in 25 years, what monthly payment should you make after you refinance?

c. Suppose you are willing to continue making monthly payments of $1402. How long will it take you to pay off the mortgage after refinancing?

d. Suppose you are willing to continue making monthly payments of $1402, and want to pay off the mortgage in 25 years. How much additional cash can you borrow today as part of the refinancing?